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Macroeconomics (2) > 4.1 Trade and Trading Blocs > Flashcards

4.1 Trade and Trading Blocs Flashcards

1
Q

What is absolute advantage?

A

A country’s ability to produce a good or service more efficiently (at a lower cost) than another

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2
Q

What is comparative advantage?

A

When a country can produce a good or service at a lower opportunity cost than another country

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3
Q

What are 2 assumptions of the comparative advantage theory?

A
  • Assumes that factors of production are perfectly mobile
  • Assumes that goods are homogenous (difficult to conclude advantage between 2 countries if goods cannot be perfectly compared)
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4
Q

What are 2 advantages and 2 disadvantages of trade?

A
  • Enables greater consumer choice
  • Allows countries to benefit from greater economies of scale
  • Can lead to over-dependence, reliance on particular exports or imports
  • Leads to structural unemployment (jobs lost to more efficient and competitive foreign firms)
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5
Q

What 4 factors influence the pattern of trade?

A
  • Comparative advantage
  • Emerging economies (growing countries likely to need importing and exporting)
  • Trading blocs and agreements
  • Relative exchange rates
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6
Q

What is a trading bloc?

A

A group of countries that come together and form agreements to promote trade and economic cooperation among themselves

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7
Q

What is a bilateral trade?

A

An economic agreement between two countries that aims to reduce trade barriers between them

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8
Q

What are 5 types of trading blocs (from lowest to highest integration)?

A
  • Preferential trading areas (PTA)
  • Free trade area (FTA)
  • Customs union
  • Single market
  • Monetary union
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9
Q

What are 2 aims of trading blocs?

A

- Trade liberalisation: the removal/reduction of barriers to trade
- Trade creation: trade deal agreements that promotes trade between countries

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10
Q

What is a preferential trading area (PTA)?

A

A gradual agreement where trade barriers e.g tariffs are reduced only on select goods/services between member countries

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11
Q

What is a free trade area (FTA) and an example?

A

Where member countries agree to remove trade barriers with one another, but impose separate trade barriers with non-member countries e.g USMCA

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12
Q

What is a customs union and an example?

A

Where member countries agree to reduce/remove tariff and non-tariff barriers to ensure free trade, while imposing a common external tariff for non-member countries e.g EU and Turkey

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13
Q

What is a single/common market and an example?

A

Where member countries trade freely and impose a common external tariff on non-member countries, while allowing the free flow of factors of production (land, labour, capital, enterprise) between member states e.g EU

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14
Q

What is a monetary union and an example?

A

A group of countries that agree to share a common currency, which means they have a single monetary policy and exchange rate e.g EU

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15
Q

What is a multilateral trade agreement?

A

International agreement between 3 or more countries to lower trade barriers with one another, under the guidelines of the WTO

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16
Q

What are 2 advantages and 2 disadvantages of trading blocs?

A

- Free trade: leads to increased specialisation, increased output, lower prices
- Creates greater access to markets: results in economies of scale

- Loss of sovereignty/independence: no control over monetary and come fiscal factors (problematic during economic hardship)
- Trade diversion: shifts from low to high cost member producer (reduces specialisation/comparative advantage)

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17
Q

What is trade diversion?

A

The shift of importing goods/services from low-cost countries to high-cost countries (mainly occurs when country joins trading bloc or when protectionist policies introduced)

18
Q

What is trade creation?

A

The shift of importing goods/services from high-cost countries to low-cost countries (mainly occurs when country joins a trade union)

19
Q

What is protectionism?

A

The use of economic policies to restrict free trade between countries

20
Q

What are the 4 types of protectionism?

A
  • Quotas
  • Tariffs
  • Subsidies
  • Embargos
21
Q

What are 3 reasons for protectionism?

A

- Protect an infant/sunrise industry: developing industry cannot access economies of scale advantages compared to larger firms, need to be able to build reputation/customer base
- To prevent dumping
- To avoid over-specialization: ensure a country (firms and producers) does not become overly reliant on the export of a good as a change in global markets can harm the national economy

22
Q

What is dumping?

A

When firms sell their products abroad in export markets at below costs or significantly below prices

23
Q

What are 2 arguments against protectionism?

A
  • Competition & Innovation reduced
  • Less Consumer Choice
24
Q

What is a tariff?

A

A tariff is a tax on imported goods/services which raises the selling price of it within the country

25
Q

What are 3 reasons for a tariff?

A
  • Protect the domestic industry
  • Improve trade balance
  • Raise government revenue
26
Q

Describe 2 impacts of a tariff

A

- Increased inefficiency in production (more inefficient domestic firms are now producing compared to efficient foreign firms=welfare loss)
- Domestic income worsens (consumers forced to pay higher prices, lower consumer surplus)

27
Q

What is a quota?

A

A physical limit on the goods that can be imported into a country

28
Q

Describe 3 effects of an import quota

A

- Domestic employment increases (producers increase output of goods)
- Domestic consumers are worse off (must pay higher prices and can only buy a smaller quantity)
- Domestic producers are better off (they receive a higher price and can sell a larger quantity)

29
Q

What is an export subsidy?

A

Government policies that are implemented to incentivize domestic producers to export more of certain goods

30
Q

Describe 2 impacts of an export subsidy

A
  • Can worsen government budget
  • Domestic firms more internationally compeitive (can lower price of their output)
31
Q

What is a non-tariff barrier?

A

A way to restrict trade using trade barriers in a form other than a tariff

32
Q

Name 4 non-tariff barriers

A

- Quotas
- Embargos (government restriction
placed on the import or export of goods to another country)
- Licenses/permits (governments may require licenses or permits for certain goods to be imported)
- Regulation e.g intellectual property

33
Q

What is an export quota?

A

A physical limit on how much of a good can be exported out of a country in a certain time period

34
Q

What is the effect of export subsidies on domestic producers?

A
  • The subsidy lowers the cost of production for producers, meaning they can charge lower prices
  • This makes them more competitive both domestically and internationally
35
Q

What is the WTO?

A

An international organization that sets the rules for global trade and dispute resolution

36
Q

What are the 2 main aims of the WTO?

A
  • To promote trade liberalisation
  • To ensure countries act according to their trade agreements
37
Q

What are 2 possible conflicts of the WTO?

A

- Unequal bargaining power (powerful/developed nations have more influence)
- Controversy over primary products (developed countries wish to protect domestic farmers so introduce high tariffs, contradicts WTO principles)

38
Q

What is an advantage and a disadvantage of a monetary union?

A
  • Exchange rate certainty (facilitates trade between members as eliminates ER volatility)
  • Loss of economic sovereignity (less freedom/flexibility to adjust policies or ER e.g depreciation during recession)
39
Q

What are 3 conditions necessary for the success of a monetary union?

A
  • High integration
  • Flexible labour markets
  • Similar economic cycles
40
Q

What is a cost and benefit of regional trade agreements?

A
  • Trade creation (improves efficiency and generates higher income)
  • Loss of sovereignty (lose their ability to set interest rates + monetary policy)
41
Q

What is a regional trade agreement?

A

A treaty between two or more countries, encouraging free movement of goods and services

42
Q

What is a conflict between regional trade agreements & the WTO?

A
  • RTA shift trade from a non-member with comparative advantage, to a member who does not
  • RTA members implement common trade barriers on non-members which is the opposite of trade liberalisation (protectionism)

Macroeconomics (2) (6 decks)

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